Filed by Dynegy Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule14a-12
of the Securities Exchange Act of 1934
Subject Company: Dynegy Inc.
Commission File No.: 001-15659
Subject Company: Enron Corp.
Commission File No.: 001-13159
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Although Dynegy and Enron believe these
statements are accurate, their businesses are dependent on various regulatory
issues, general economic conditions and future trends. The completion of the
transaction is conditioned upon the fulfillment of a number of conditions, and
the success of the combination of the two companies will be dependent on a wide
range of issues. These factors can cause actual results to differ materially
from the forward-looking statements that have been made. In particular:
The benefits that are expected to result from the combination are predicated
upon the belief that combining the complementary expertise and resources of
Dynegy and Enron will result in increased opportunities and decreased expenses.
Because of the complexity of the environments in which the two companies
operate, there can be no certainty that these benefits will be achieved to the
extent expected.
The estimate of the accretiveness of the transaction reflects the companies'
current best estimates based upon available information and numerous assumptions
and, accordingly, may or may not be achieved if business conditions change or
the assumptions that have been made do not prove to be accurate.
Significant regulatory approvals are necessary to complete the transaction,
including approvals under the HSR Act, the FERC, the SEC and certain state and
foreign authorities. There can be no assurances that the exemption and approvals
will be obtained on a timely basis and on acceptable terms. In addition, Dynegy
and Enron operate in regulated environments. Any significant changes in these
regulatory environments could negatively impact the transaction and the combined
entity.
ADDITIONAL INFORMATION
In connection with the proposed transactions, Dynegy and Enron will file a joint
proxy statement/prospectus with the Securities and Exchange Commission.
INVESTORS AND SECURITY HOLDERS ARE URGED TO CAREFULLY READ THE JOINT PROXY
STATEMENT/PROSPECTUS REGARDING THE PROPOSED TRANSACTIONS WHEN IT BECOMES
AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors and security
holders may obtain a free copy of the joint proxy statement/prospectus (when it
is available) and other documents containing information about
Dynegy and Enron, without charge, at the SEC's web site at www.sec.gov. Copies
of the joint proxy statement/prospectus and the SEC filings that will be
incorporated by reference in the joint proxy statement/prospectus may also be
obtained for free by directing a request to either: Investor Relations, Dynegy
Inc., 1000 Louisiana, Suite 5800, Houston, Texas 77002, Phone: (713) 507-6466,
Fax: (713) 767-6652; or Investor Relations, Enron Corp., Enron Building, 1400
Smith Street, Houston, Texas 77002, Phone: (713) 853-3956, Fax: (713) 646-3302.
In addition, the identity of the persons who, under SEC rules, may be considered
"participants in the solicitation" of Dynegy and Enron shareholders in
connection with the proposed transactions, and any description of their direct
or indirect interests, by security holdings or otherwise, are available in an
SEC filing under Schedule 14A made by each of Dynegy and Enron on November 13,
2001.
This filing contains a transcript of the conference call which was held on
November 12, 2001 to discuss the merger of Dynegy and Enron. This transcript is
being filed pursuant to Rule 425.
TRANSCRIPT OF NOVEMBER 12, 2001 CONFERENCE CALL
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 1
SITRICK & CO.
NOVEMBER 12, 2001
8:00 A.M. CST
Coordinator Hello and welcome to the Dynegy-Enron merger
conference call. At the request of Dynegy, this
conference is being recorded for instant replay
purposes.
At this time, I'd like to turn the conference over to
Ms. Meg Nollen, Senior Vice President of Investor
Relations for Dynegy. Ms. Nollen, you may begin.
M. Nollen Thank you and good morning, everyone. I need to start
this call out with our standard Safe Harbor language.
I'll be reading it in its entirety, so you all can
take a breath.
Certain statements made during this call are
forward-looking. Although Dynegy and Enron believe
these statements are accurate, their businesses are
dependent upon various regulatory issues, general
economic conditions and future trends.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 2
The completion of the transaction is conditioned upon
the fulfillment of a number of conditions, and the
success of the combination of the two companies will
be dependent on a wide range of issues. These factors
can cause actual results to differ materially from
the forward-looking statements that have been made.
In particular, the benefits that are expected to
result from the combination are predicated upon the
belief that combining the complementary enterprise
and resources of Dynegy and Enron will result in
increased opportunities and decreased expenses.
Because of the complexity of the environments in
which the two companies operate, there can be no
certainty that these benefits will be achieved to the
extent expected.
The estimate of the accretiveness of the transaction
reflects the company's current best estimates based
upon available information and numerous assumptions,
and accordingly may or may not be achieved if
business conditions change or the assumptions that
have been made do not prove to be accurate.
Significant regulatory approvals are necessary to
complete the transaction, including approvals under
the Hart-Scott-Rodino Act, the Federal Energy
Regulatory Commission, the Securities and Exchange
Commission and certain state and foreign authorities.
There can be no assurances that the
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 3
exemptions and approvals will be obtained on a timely
basis and on acceptable terms.
In addition, Dynegy and Enron operate in regulated
environments. Any significant changes in these
regulatory environments could negatively impact the
transaction and the combined entity.
In connection with the proposed transactions, Dynegy
and Enron will file a joint proxy statement and
prospectus with the Securities and Exchange
Commission. Investors and security holders are urged
to carefully read the joint proxy
statement/prospectus regarding the proposed
transaction when it becomes available, because it
will contain important information.
Investors and security holders may obtain a free copy
of the joint proxy statement/prospectus, when it is
available, and other documents containing information
about Dynegy and Enron without charge at the
Securities and Exchange Commission web site at
www.sec.gov. Also, you can receive those documents by
contacting either company's Investor Relations
Department.
In addition, the identity of the persons who, under
SEC rules, may be considered "participants in the
solicitation" of Dynegy and Enron shareholders in
connection with the proposed transactions, and any
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 4
description of their direct or indirect interests, by
security holdings or otherwise, are available in an
SEC filing under Schedule 14A made by each of Dynegy
and Enron.
With that I'm going to turn the call over to Chuck
Watson. I would caution, there is a very large volume
of callers trying to get in and I believe we are
reaching maximum lines both on phone and Intranet.
You can let those of your associates who did not get
on know that there will be a replay.
With that, I'll turn this call over to Chuck Watson,
Dynegy's Chairman and CEO.
C. Watson Thank you, Meg. I'd like to personally welcome all
the analysts and the media on the line today and
really all the listeners, especially Dynegy and Enron
shareholders, our employees, and partners.
We're here this morning to discuss an exciting
business combination between Dynegy and Enron. You'll
hear why we're confident that this is good
strategically and financially for Dynegy and Enron.
You'll hear why this combination is also good for our
shareholders, good for our employees and good for the
entire industry. Joining me here this
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 5
morning to convey this exciting story from Dynegy our
President, Steve Bergstrom; our Executive Vice
President and Chief Financial Officer, Rob Doty; from
Enron, Chairman and CEO, Ken Lay and President and
Chief Operating Officer, Greg Whalley. Greg will join
Steve, Rob and me in the Office of the Chairman of
the new Dynegy.
Last Friday night, Dynegy and Enron completed our $24
billion merger agreement that most of you had already
heard about. The merger of Dynegy and Enron will fuse
two groups of talented, dedicated people who share a
passion for their work.
This is a strategic merger that injects confidence
and creditability into the energy marketplace,
accelerates the execution of both companies'
strategies and unleashes the earnings potential of
our North American and European energy networks. The
fact that Dynegy's largest shareholder,
ChevronTexaco, has committed equity towards this
transaction to retain their ownership interest in the
combined entity underscores their confidence in this
merger.
Yes, the combined company, which will be named
Dynegy, will have superior physical delivery
capabilities and unparalleled experience navigating
competitive markets for our customers.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 6
From a financial standpoint, there's nothing but
upside in this transaction. This combination is 35%
accretive to Dynegy shareholders without any of the
more than $400 million of synergies that we continue
to expand upon everyday. By providing immediate
liquidity and financial stability for Enron, we are
confident this combination provides the greatest
potential value for Enron's shareholders.
With that, I'd like to introduce Ken Lay to share the
Enron perspective on the merger.
K. Lay Thanks, Chuck. As might be expected, this is a very
reflective time for me and of course many of my
colleagues at Enron. Having helped create Enron in
1985 when I, as Chairman and CEO of Houston Natural
Gas, and our board of directors agreed to merge
Houston Natural Gas into Internorth, I did not expect
to some day be involved in creating the next world
leading energy merchant company by merging Enron into
another company.
But that's what we're doing. I and the Enron Board
have approved this transaction because we believe it
provides a great opportunity for our shareholders,
our customers and our employees.
The company we are creating will have a strong
balance sheet, a
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 7
world-class merchant energy operation and a lot of
liquidity. It will also be the world leader in all of
its core businesses. I agree with Chuck that this
combination will uncover and refocus attention on the
true earnings potential of Enron's core energy
businesses.
Few of the alternatives we considered could
seamlessly assimilate with Enron's wholesale
marketing and trading business as well as its retail,
commercial/industrial business and its very strong
pipeline business.
It will join together two companies with deep roots
in the Houston community and the energy industry. I
am personally committed to working with Chuck and
Steve and their colleagues in the months ahead to
accomplish the merger and to build a solid foundation
for strong future value creation.
I'll now turn it back over to Chuck.
C. Watson Well thank you, Ken. Once again, this merger is about
accelerating our strategy by three to four years.
Dynegy is always looking for more effective ways to
serve our customers and to expand our competitive
reach across markets by leveraging our ever-growing
global energy delivery network.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 8
Enron's core energy business is very strong with
solid earnings and cash flow. It's an incredible
pipeline infrastructure, matched with a wholesale and
commercial industrial marketing business that
continues to perform despite the failure of
businesses that were not strategic to this core
sector and clouded the company's reputation and
damaged its performance.
The new Dynegy, like the current Dynegy, will be an
asset-backed company with an expanded global energy
delivery network and tremendous intellectual capital.
We have a great opportunity to put together an
outstanding management team who understands the
business we're in as well as anyone possibly could.
We will be a formidable competitor with solid values,
and I have confidence that the employees of both
companies will want to be part of that future.
Culturally, it's a good fit. There has been great
mutual respect between us over the years - even as we
were competitors and counterparties, shippers and
partners. Both companies have talented, dedicated,
passionate employees who have conducted themselves
with honor and character for more than 16 years.
Let us not taint the 20,000 employees at Enron with
the same brush that a
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 9
few bad apples may deserve. We'll mirror Dynegy's
more team-oriented compensation program and
incentivize employees to be as concerned about how
they perform, and maybe that leads me to my final
comments. It kind of surrounds the notion of my
long-term vision for the new Dynegy.
It should not surprise anyone that it's the same as
the old Dynegy. Dynegy will be a leading global
energy merchant respected for the manner in which we
deliver extraordinary value to our stakeholders.
Now with that, I'd like to ask Steve to put some
detail around what these two companies will look like
when we put them together. Steve?
S. Bergstrom Thank you, Chuck, and good morning, everyone. I want
to make a few comments about the Enron core business,
which is an earnings engine that we are very familiar
with, and they are very familiar with ours as well.
Over the last two weeks, we've had the opportunity to
look under the hood of their core business and have
performed considerable due diligence, and found no
surprises in their core business.
Over the next six to nine months, we plan on doing a
thorough evaluation of their core business to
validate the look that we had in the last couple of
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 10
weeks. There are several protections for Dynegy's
shareholders if in the very unlikely event we find
something surprises us, but we really don't expect to
find anything material.
In the last two weeks, we validated exactly what we
expected, that Enron's core energy business franchise
is very, very strong. There never have been any
problems in their wholesale marketing and trading
business and that's where we see the greatest fit
with Dynegy.
It throws off significant earnings and cash flow and
is a very solid franchise. The key point here, as
Chuck mentioned, is that Enron's under-performing
assets, outside of their core energy franchise, have
been dragging cash flow and earnings from the core
business.
Once we clear the slate when this merger closes, we
will unleash the value of Enron's core energy
franchise. Their core franchise is about four to five
times our size, and it is a business which we are
very familiar with.
The combined entity will be very well positioned with
a comprehensive asset-backed energy delivery network,
intellectual capital which leverages the core asset
positions, the leading wholesale natural gas and
power franchises in the world, principal energy
market maker and liquidity provider, complimentary
physical and financial capabilities, diverse
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 11
pipelines and generation assets, and a premiere
technology infrastructure and platform.
Enron Online is a much larger platform than
Dynegydirect. It is the leading market-maker platform
for gas and power, which is tremendously scalable.
While EOL is ahead of Dynegydirect, there are
functional similarities and synergies between the
two, and we expect to use the best of both. We'll
evaluate the best possible way to move forward with
one platform.
Enron has also created a profitable C and I retail
business. EES, their retail operation or their
commercial industrial operation, is three to four
years ahead of where Dynegy is in its early life.
As a lot of you know, we've embarked over the last
nine months to a year on our C and I strategy.
Although Dynegy probably wouldn't invest the same
amount of money as Enron has in the past, clearly
Enron has turned the corner and EES has become an
earnings contributor and a growth engine for Enron
and will continue in the combined company.
Obviously there are many synergies with the
combination of these two companies. There is a modest
overlap between the two companies as we are large
customers and trading partners of each other, and
we'll have
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 12
some customers that we share who the combined company
will reach credit limit. However, we believe that the
synergies associated with the combination of this
enterprise will more than offset the business loss of
any customer overlap.
Now I'd like to turn it over to Rob Doty, our Chief
Financial Officer, who can give you more details
about the merger.
R. Doty Thank you, Steve. Let me start off with a few
highlights regarding the transaction. A lot of this
has been reported and assessed, but I'll try to keep
it to the points that might give you some additional
color around the transaction.
As you know, the transaction is a stock-for-stock
merger. The total deal size, and there are different
ways to kind of look at this, but the total deal size
we believe is about $24 billion. That's $9 billion of
equity, calculated as our closing price times the
0.2685 exchange rate, plus $2 billion of preferred
stock, plus about $13 billion of long-term and
short-term debt at September 30th.
The fixed exchange ratio of 0.2685 means that each
Enron share will be converted into 0.2685 Dynegy
shares. We believe that allows the Enron shareholders
to participate in the appreciation of or in the
acceptance of this transaction.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 13
As we stated in the press release, the merger will be
accounted for as a purchase of Enron by Dynegy. As a
result, all assets and liabilities will be fair
valued at closing. We will, of course, post
appropriate reserves for litigation and other
contingencies at that point in time.
As you know, ChevronTexaco is solidly behind this
transaction. They have committed $2 1/2 billion to
the deal. That comes in two pieces: a billion and a
half up front, immediately essentially, as well as a
billion at closing.
The billion and a half up front is contributed first
to Dynegy in exchange for a convertible preferred
security, and that will convert into common stock at
the closing. In turn, Dynegy will purchase a
convertible preferred security in Northern Natural
Pipeline as well as receive an option to purchase all
the common stock of that pipeline for little
additional consideration. At closing, this preferred
will convert into common stock with the new company,
as I said.
If the transaction is terminated for any reason,
Dynegy would exercise the option and acquire Northern
Natural. There are some limited circumstances where
Enron can retire the preferred before conversion if
the transaction is terminated.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 14
We have spent a lot of time addressing Enron's
current liquidity needs and we feel that the billion
and a half contribution immediately through
ChevronTexaco plus the new billion-dollar bank
facility plus the substantial cash on hand should
easily provide Enron with adequate liquidity to
conduct business. This should put any fears
surrounding Enron's liquidity immediately to rest.
The bottom line with respect to the structure of the
billion and a half is it gives Enron sufficient
interim liquidity to conduct and grow their business
and it protects Dynegy's financial position should
the transaction terminate.
With respect to the remaining billion, that will be
funded at closing in exchange for common stock. In
addition to the $2 1/2 billion that ChevronTexaco is
contributing, committed to contribute, they have the
right to purchase another billion and a half dollars
worth of stock over the next couple of years. Really
strong support from Chevron as you can see.
The merger is expected to close in six to nine
months, probably the third quarter of 2002. We need
the approvals that Meg mentioned earlier. The feeling
of both companies is that those approvals should be
granted.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 15
Let me make a few comments about the new company's
balance sheet and its capital structure. We looked
very carefully at the equity needs of the new
company; we believe that the ChevronTexaco
contribution in total of $2 1/2 billion will
adequately capitalize the new company. The
debt-to-capitalization ratio on a GAAP basis at
closing is expected to be less than 45% and we are
very comfortable with the ultimate capital structure.
With respect to the dealings that we've had with the
rating agencies, we have completely laid out the
business and financial impacts of the combination to
all three rating agencies. Those discussions centered
around Enron's current financial position, the new
company's business and financial position, and the
impact of the transaction on Dynegy.
Based on our conversations with them, we believe that
the rating agencies like the combination, both from a
business and a financial point of view. They believe
the new company will be well capitalized, and they
will, of course, be doing more work between now and
closing to make sure that they get a little bit
better handle on what they've seen so far.
From now until closing, we believe Enron will
maintain its investment grade ratings, although they
will be on the weak end of investment grade. Dynegy's
ratings will be affirmed, but we will remain on
credit watch pending the closing.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 16
Let me talk to you a little bit about the
accretiveness of this transaction. I think many of
you in the audience have run your own numbers at this
point, but I'll tell you how we've run our numbers.
This merger is substantially accretive in the first
year, as you know: $0.90 to $0.95 per share, or about
35% to the existing Dynegy shareholders.
The math is pretty simple if you assume Dynegy were
to make what the analysts' consensus amount is, $2.56
at this point. We assumed Enron would make
conservatively $1.50. The analysts' consensus at this
point is $2.00. We took a conservative haircut of
25%.
The new company will have about 650 million shares
outstanding. Dynegy shareholders will have about 420
million shares and Enron shareholders will have about
230 million shares. ChevronTexaco is expected to have
about 169 million shares of those at closing.
You also in your assumptions need to assume a
reasonable reduction in interest expense related to
the $2 1/2 billion contribution from ChevronTexaco,
and if you use those assumptions and you do the math,
you will get an EPS estimate on a pro forma 2002
basis of about $3.40 to $3.50.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 17
This is not actual EPS for 2002 because the
transaction is not expected to close for six to nine
months, but it is a solid indication of the level of
accretion that will be achieved post closing.
This is tremendous. Remember in the math that I just
went through with you, we did not consider in those
numbers any amounts related to cost savings or
synergies, which are expected to be fairly
significant. So as you can see, this is a
tremendously accretive transaction.
Finally, with respect to a long-term growth rate for
the combined company, we think that that should
easily fit in the 15% to 20% range for the next three
years. Let me make some final comments on financial
policy of the company going forward.
Let me assure you that Dynegy will manage the new
company in a manner very consistent to the way that
we've managed Dynegy historically. We will work hard
to make sure that company disclosures are very
transparent and understandable. We will substantially
simplify the balance sheet and the capital structure,
and we will reduce the level of financial leverage
both on and off the balance sheet.
Finally, we will manage the business for cash flow in
addition to earnings.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 18
That's our commitment to you that will completely
change from a financial standpoint how the combined
company will be run going forward. It will be much
more like Dynegy has run its business in the past.
Then the last point I'd like to make is some have
hypothesized that Dynegy did this deal because Enron
owes Dynegy a substantial amount of money. That is
just simply not true.
Dynegy currently owes Enron. Enron does not owe
Dynegy. The amount that we currently owe Enron is
fairly immaterial, less than $50 million, but I think
that underscores the point that it's just simply not
true that there's some substantial liability from
Enron to Dynegy. We are doing this transaction
because of the very significant value that it brings
to our shareholders.
With that, I will turn it over to Greg Whalley.
G. Whalley Yes, thank you. I absolutely agree with Chuck, Ken,
Steve and Rob that this is clearly the best solution
for Enron and its stakeholders.
Along with our recently completed bank financing,
this equity infusion will immediately provide ample
liquidity to maintain and grow our energy
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 19
marketing and trading business. This merger, I'm
pleased, validates the strength of Enron's core
wholesale, retail and gas pipeline businesses, and it
protects and enhances our core energy franchise.
This is also the best cultural and strategic fit.
Dynegy understands us and we understand Dynegy. As a
stock transaction, this merger provides the greatest
potential value to our shareholders, and we're
excited about the prospects of the combination.
Ultimately we hope to restore confidence and regain
access to the capital markets and continue to grow
our solid core business. With that, Chuck?
C. Watson Greg, thank you. I hope all of you can sense the
excitement of this new opportunity.
This is really a new platform, as Ken said, for the
future for these two companies. This is also a new
day for the Enron and the Dynegy employees, and we
are simply excited about what this opportunity has
and are very confident that we can integrate these
two companies in a way that presents the best
opportunity for success, and then we can grow this
company over the next several years both in North
America and around the world.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 20
With that, operator, I'd be happy to turn it over to
the questioners at this time. Thank you all for
listening.
Coordinator Thank you. One moment while the questions register.
Our first question comes from Paul Patterson from ABN
Amro.
P. Patterson Good morning. My question, I guess, is for Enron - in
terms of what exactly happened in terms of selling
the company.
Did you speak to many people? I mean in other words,
it just looks a little odd that the company is
selling itself at such a discount if the core
business is so strong. Was there just simply no
liquidity out there? Could you just elaborate a
little bit more in terms of what the situation was
that brought you to the point of selling your company
at this level and why there was really no other
alternative than this?
Then I guess the second question I have is for
Dynegy. What the cash flow accretion might be? You
mentioned the earnings accretion, but could you give
us an idea of what you're expecting in terms of cash
flow?
K. Lay Paul, this is Ken Lay. I'll go first on that. We did
have other alternatives, particularly financial
alternatives, and we were going on parallel paths. At
the same time we were talking with Dynegy, but we all
became convinced
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 21
particularly over the last week or so that the best
alternative both financially and strategically was
Dynegy.
I mean, we can see some great benefits for both
companies, some great synergies. Obviously all the
things we've mentioned today. We have similar
cultures, similar strategy. Then this does, of
course, significantly strengthen the Enron balance
sheet and liquidity position. We think substantially
increases it to a point to where it should not even
be an issue.
But it was necessary to stabilize the ship and of
course to get the liquidity that we needed as well as
strengthen the balance sheet. This, as well as the
financial alternatives, could have done that, but
this appeared to us to be by far the better
alternative. It still allows our shareholders to
benefit from the ride back up which we're fully
convinced will occur with this combination.
P. Patterson In other words, you felt the financial alternatives,
if I'm correct here, were such that your stock would
not appreciate enough vis-a-vis what you're selling
the company for right now?
K. Lay Well again, as I said, we thought the stock for stock
transaction that Dynegy proposed gave our
shareholders a better alternative than the financial
alternatives. It did come together. Obviously having
the strong
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 22
support of ChevronTexaco behind it was another
factor.
I mean for them to step up and commit $2 1/2 billion,
$1 1/2 billion immediately to thiS transaction and of
course, at least indicate some interest and maybe put
in another $1 to $1 1/2 billion in the combined
company provided a really strong underpinning to what
we're doing here.
P. Patterson Okay and the cash flow accretion?
R. Doty Yes, this is Rob Doty. I will take a shot at that.
The cash flow for the Dynegy shareholders before this
transaction for next year was expected to be $3.75 to
$4.00 a share. With this transaction, we should see a
level of accretion similar to what we saw in the EPS
side, so that the total new combined company should
have cash flow per share somewhere in the $5.00
range.
That's very significant. That's cash flows somewhere
between $3 billion and $3 1/2 billion on an annual
basis.
P. Patterson And that's operating cash flow?
R. Doty Yes, operating cash flow.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 23
P. Patterson Thank you very much.
Coordinator Thank you. Our next question comes from Annie Sow
from Alliance Capital.
A. Sow Hi, everyone.
M. Nollen Good morning.
A. Sow Good morning. Can you talk about more detail in terms
of your regulatory risks? According to the newspaper,
you have to go through a lot of regulatory approvals.
Can you just walk through that for us?
S. Bergstrom Yes, Annie. This is Steve. We have several approvals
we have to go through, but we really don't see a
whole lot of risk in those. It's just a matter of
time.
I think the FERC will probably be the pacesetter for
regulatory approval. All the rest, the approvals
should come ahead of the FERC. So that one will be
the one that takes the most time.
But we've spent a lot of time talking about this and
looking at this over the
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 24
last two weeks, both us and Enron. I think we both
agree that this thing should happen within the next
six to nine months.
C. Watson Annie, this is Chuck. Let me just say I don't want to
minimize at all the importance of getting those
regulatory approvals. I believe this is very doable,
but I think it's a complicated transaction and
combination that'll have to be explained.
So while we don't want to minimize it and we're going
to be respectful of every one of those organizations
to make sure we get their approvals, we really are
confident that up and down the line, we're going to
be able to convince them that this is really in the
best interest of the energy industry as well as these
two respective companies.
A. Sow How about all the pending lawsuits? Can you touch on
that? I mean, it could be much worse than we think.
C. Watson Annie, anytime you do a transaction like this, you
evaluate, from our perspective, you evaluate the
risks and you put it in your economics. We've had the
best lawyers. They're familiar with this, working
with us over the last two weeks and we feel very
comfortable.
We know the issues. We've looked at them in detail.
You value the risk
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 26
associated with that and you put it in your economics
and you move on down the road.
K. Lay Annie, I'll add to that at least a couple of things.
First, of course, obviously we are not the first
company to have derivative lawsuits, shareholder
derivative lawsuits or class action suits, and indeed
there's now enough history over a long number of
years even pretty much by jurisdiction, etc. that
there are good ways of at least putting some
quantification around the outer limits of what might
happen here.
I know our team has done that. I know Chuck's team
has done that. So even though the number may be
pretty big, you're able to pretty well quantify that
and fence it in and then put it away. Then of course
what happened here was I think Chuck and his team
decided that there's an awful lot of value between
the counter price that they were paying and of course
getting to where that would be any consideration in
this transaction.
C. Watson Annie, this is Chuck. Let me just summarize by saying
that we have done a lot of what Ken said. We
literally have taken what we think is sort of a worse
case and even in that worse case, there's a
tremendous amount of economic value here for both
companies.
So I'm comfortable. We don't have all, obviously,
nobody has all the
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 26
facts yet and we think, by the way, it's going to be
substantially less than our maximum account. But I'm
comfortable even in that case.
This is a very, very good economic transaction for
both companies.
A. Sow Are there other things that we should be aware of
that will materially impact the way you report? I
mean, it's in the paper talking about Enron violating
the basic rule of accounting. How do we know as the
shareholders you don't have anything else that you
hide and we are not aware of?
K. Lay Well, if you're addressing that to Enron, this is Ken
Lay.
A. Sow Yes.
K. Lay We don't have anything we're trying to hide. Quite
the contrary, I think we've been very forthcoming.
I'm disclosing everything that we've found.
Now obviously the internal investigation is still
underway. So we're not to the end of it, but we have
of course disclosed anything and everything that
we've found so far.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 27
It is interesting. I mean I know the characterization
is being made about the restatement of earnings.
Basically that resulted from some technical problems
with a couple of the special, the SPEs that were set
up, where in fact there was not quite enough risk
capital left in them or put in them or left in them
for them to qualify.
Indeed virtually all of the restatements could have
been prevented with about $30 million or so of more
risk capital in two of these SPEs.
S. Bergstrom Annie, I might also give you the Dynegy view on that.
We have looked at the accounting practices. We have
looked at the 8-K very carefully. We have gone
through all of those issues with senior management.
Even though nobody can tell you there is absolutely
nothing else because there are several investigations
that continue, we are very hopeful that everything
has been put on the table. That was the strategy at
this point.
We're comfortable that senior management inside of
Enron is doing everything they can to identify the
issues and they have disclosed everything that they
are aware of at this point in time. On a go-forward
basis, we will run, as I said earlier, this company
much more conservatively from a financial point of
view, and we would never expect anything like this to
happen in the future.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 28
I might just make one more comment. All of the issues
that revolve around the restatement have to do with
things other than the core business. The core
business is why we're here and the reason that we are
very interested in Enron.
A. Sow Thank you.
Coordinator Thank you. Our next question comes from Paul Tice
from Deutsche Bank.
P. Tice Yes, three quick questions. First, you said that
you're comfortable with the liquidity that Enron will
have in the interim. Can you speak to some of the
deals that are coming due, specifically the share
trust deals like Osprey and what the plan is for
paying those off? By your comment about clearing the
decks before you close, my guess is that you'd like
to see a lot of this cleaned up before you close the
deal.
R. Doty Yes. I might take a stab at that, and we also have
Jeff McMahon, the Chief Financial Officer of Enron,
on the phone. We might get him to give his views as
well.
But we do think that the liquidity position of the
company will be very strong in the interim and not
only will have the billion and a half infusion,
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 29
they'll have the new bank facility which is, I think,
providing net liquidity increases of about $750
million. Then they also have substantial cash on hand
as of the last time I looked, which was late last
week. It was close to a billion dollars. So that
should put everybody's concerns to rest concerning
Enron's liquidity.
Osprey, at least from our standpoint, we have looked
at that deal being unwound in the late summer of next
year and our merger economics, and that is fully
taken into account in our cash flows for Enron
between now and closing. I don't know if you have any
additional color on those things, Jeff. But if you
do, you might raise them.
J. McMahon Yes, the only thing I would add, Rob, is that as
we've all discussed, we're embarking under a fairly
rigorous asset sale program. So proceeds from that
obviously can also be used to apply to the Osprey
trust liquidation as well.
R. Doty Excellent point.
P. Tice Away from Osprey, you've got Marlin coming in a few
months. Is the goal to unwind that prior to the
merger or after?
C. Watson Our goal, at this point and Jeff your views on this
will also be important,
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 30
our view on Marlin was it would be unwound after
closing.
P. Tice Okay. Last structure question. The credit link note
issues that Enron has outstanding, a number of them -
will those be kept outstanding post merger?
R. Doty Many of the off balance sheet financings, including
the credit link note structures, actually mature
during the interim period between now and closing.
The off balance sheet obligations are substantially
reduced during this period and so not all of the
credit link notes will be gone, but if you take all
of the structured financings between now and closing,
a substantial portion of them will be reduced.
P. Tice Okay. Then to Jeff's point about the asset sale
program, most of these assets, I would assume, that
Dynegy doesn't care about on a going forward basis,
so you would also like to see the disposal process
wrapped up or forward progress made on that between
now and next year?
C. Watson Yes, this is Chuck. That is generally true in terms
of accelerating them. At the same time, while cash is
extremely important, so is value. Our numbers suggest
that we don't necessarily have to feel like our backs
are pinned against the wall in these asset
dispositions.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 31
So we're going to take a good look at every one of
them, and we're going to try to optimize the value.
So I wouldn't want to make any grand statements about
timing on anything, because I think it's important
for shareholders that we get the greatest value.
P. Tice Okay. Second question. Two of the facilities that
Enron drew down the other week, they were coming due
in April of next year. Has there been any progress in
pushing the term out on those?
J. McMahon This is Jeff McMahon. The revolving credit facility
which comes due in April that you're referring to was
a 364-day revolving credit facility. That will likely
get renewed as part of the syndication of our more
recent billion-dollar facility. So we'll be bringing
that to the market to renew it probably within the
next six to eight weeks.
P. Tice Is there any truth to the Journal article from this
morning saying that your two lead banks were
contemplating an equity infusion?
J. McMahon I don't think I want to comment on what our banks are
considering. That's probably a question for them.
P. Tice Okay. Last question. The rating agencies: did they
give you an indication, Chuck, that mid triple-B
would be the most likely outcome of the evaluation?
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 32
C. Watson Yes, they have.
P. Tice They did. Okay. Thank you.
Coordinator Thank you. Our next question comes from Jay Yannello
from UBS Warburg.
J. Yannello Good morning, everyone. Congratulations, and, Chuck,
we're counting on you not changing going forward.
I guess my question is for Steve. Steve, can you give
us a little flavor. I know it's been done before in
the financial services industry, but how do you in
fact merge ongoing live trading books, back office
systems, risk management systems. Can you just paint
us a picture on how that would progress as the deal
progresses?
S. Bergstrom Well, obviously we're separate companies here until
we close. So we're going to run our businesses like
we have been, as separate stand-alone entities. We're
in the exact same business in that regard.
We'll probably do quite a bit of interim work on the
mid and back office.
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PAGE 33
We've got a lot of costs as they do in the mid and
back office area and that's probably the easiest
place that we can consolidate and leave our front
office operating pretty much the way it is until we
get to close. Then you'll just meld the front offices
together by combining and consolidating your books
and your risk control and all that.
I don't mean to minimize that. It's going to be
difficult, and it'll be a lot of work. But it's a
business that we are familiar with and it should go
together relatively easily.
G. Whalley Yes. This is Greg Whalley. You should take a look at
it and notice that the primary issue of bringing
together is going to be the North American wholesale
energy markets.
There's not substantial integration that needs to go
on from the pipeline business or the commercial
industrial retail business. All of these components
mesh together reasonably well without a lot of
integration having to happen.
On the trading to marketing in North American energy,
it's not going to be the easiest thing to do, but if
you look at our businesses and where our businesses
are focused, I believe there's a reasonable mesh
there. It's going to be about taking the best
components of all of it and putting it
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 34
together into being the best shop, keeping in mind
that between now and close, we will be two distinct
presences in the market from a front office
standpoint.
I do believe that the opportunity to, over time,
after close, merge back-office systems and procedures
will probably create substantial synergies and create
the opportunity to choose the best of the systems to
deal with. So I don't want to minimize either the
difficulty in doing this, but it's very possible and
very workable, and I believe that our organizations
will be excited about putting it together.
J. Yannello Okay. I should have specified. I actually meant after
the deal was closing, but I apologize for that
confusion.
When the deal is closed, you will then have initially
two separate trading books. So then do you create a
new system, and then piece by piece you put them into
a new book, if you will? Is that just basically how
it goes?
S. Bergstrom Well, Jay, we currently have multiple books as does
Enron already. You have different books for different
purposes, and when you put the two together, you'll
obviously have some overlap, but the combined company
will have multiple books as well.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 35
You just combine the overlap together. The ones that
aren't overlapped, they'll just keep going down the
path they're heading.
J. Yannello Okay, fair enough. Thank you.
Coordinator Thank you. Our next question comes from David
Fleshier from Goldman Sachs.
D. Fleshier Hi. First of all, congratulations on the deal. My
first question really is as far as the depth of due
diligence that you've done, given all that we've been
through with Enron and the disappointments and
surprises, can you tell us more about the depths of
the due diligence and how confident you are that
there aren't other hanging liabilities out there,
that you've ring fenced them, that you've identified
them is really the first part of the question, here.
C. Watson David, this is Chuck. Let me start that by saying
this has been a very intense couple of weeks, but
what made it manageable is because what we were
really focused on is the core operations, and all of
the discussions over the last several months now have
to do with non-core assets and the financing and
creative financing around those.
What gave me a lot of confidence in pursuing this is
that the core business
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NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 36
has never really been challenged. There's a lot of
noise around it, but the core business we thought
worked pretty well because it's similar to what we
do.
So the fact that we were in town, that we were in the
business, we know the core business and the C and I
business. We know the pipeline business. That is the
three businesses both here and in Europe, that we
were interested in. So we didn't spend a lot of time,
and frankly there's no real economic value in our
model for anything outside the core business.
All we tried to do is put brackets around kind of how
bad anything outside the core could get and once we
did, then we looked at the core operations. So there
was a lot of work done.
I think it's important for everybody to understand
that kind of my sense of this is that, and we were in
a very unique position to be able to do the due
diligence in the time that we did, bracket the
exposure and understand and appreciate the
opportunity that was getting presented here and the
fact that we were in a position where we had a major
shareholder in ChevronTexaco that has tremendous
confidence in this company.
We've had a great strategic relationship now for
several years, and there frankly wasn't much doubt in
my mind that ChevronTexaco would step up
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 37
to this transaction once they saw it, and certainly
they did. So there aren't a lot of companies that
have all those things going for them.
That's why I say this was a very unique opportunity
that Dynegy took a quick look at and decided to take
a longer term look at, and we ended up putting this
together.
Let me just say one other thing that I've got to tell
you is very important in the dynamics of what
happened. That is that we would have probably not
even got into this had we not been approached by the
three key executives in Enron that came to us and
said, "This is the best strategic partner. We've
identified Dynegy as the best strategic partner for
us to combine with."
That is hugely important when you start thinking
about integration of management and people and
executives. This is an intellectual capital company.
Both of us have that. So I think it was very
important that we got the sense from the very
beginning that we were going to get the full
cooperation of the management team, and that made a
lot of difference and accelerated the whole process.
So I think the uniqueness of Dynegy for all these
reasons allowed us to, in a couple
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MODERATOR JOE BUNNING
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PAGE 38
of weeks - now these weren't eight-hour days - but in
a couple of weeks to get our arms around this and
then really understand the opportunity that was
presented here.
D. Fleshier Let me just push a little more, Chuck, because I hear
you on the upside and I think probably not many know
your company, and both companies will disagree on the
upside potential. I guess I want to get as much
confidence as possible that there aren't other
hanging chads out there, whatever we call them, in
terms of liabilities in these partnerships or
elsewhere, and that you're 99 and 44/100ths on that
and you're able to confirm that you've looked
everywhere, looked under every rock there. That's
really my question.
C. Watson David, David, we're not 99.9% sure of anything right
now. I mean, I think we're clearly - let's call it a
little over 90% sure on all those issues - but that's
also why the risk reward here was clearly worth doing
this deal.
I mean, I believe that we have adequately bracketed
the downside, and if you think about a 35% accretive
deal without any synergies-and really not a lot of
companies could be able to do that and achieve those
kinds of upsides-then there has to be just a
substantial, substantial material change in what we
already know.
We've also got a lot of confidence that Enron has
done an internal,
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 39
independent investigation. That's been going a lot
longer than the two weeks that we've been talking
about. So it wasn't like we were alone in doing this.
So, I don't want to minimize the impact. Obviously,
there's somebody that says, well, something could
come out of left field, that's why we have MAC outs.
I think clearly, we have those in place, but I've got
a lot of confidence that the independent people that
have been looking at this, they've been disclosing as
they find issues. I really have a good deal of
confidence but not an absolute guarantee that we're
going to be fine here.
In the remote possibility that something does come
up, obviously we've got materially adverse change
provisions in this transaction, which obviously I
don't think we're going to have to worry about. I
don't know if Ken or ...
K. Lay Jeff McMahon, would you like to add something more to
that?
J. McMahon Just kind of confirm what Chuck's saying. We're well
into our process here, as you can see. The results so
far have resulted in a restatement, as everyone has
seen.
Could there be more? Possibly. Do we expect more? No.
We've done an awful lot of work so far.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 40
We think we have identified all the transactions as
disclosed in our 8-K. But I think it is fair to say
that the investigation remains ongoing.
D. Fleshier Let me just ask one final short question. Is there
any amount of assets that you talked about being
aggressive to selling non-core assets? Can you give
us any framework over say the next 12 months? What
amount of assets you're intending to sell, or is that
yet to be defined?
J. McMahon I would say from an Enron perspective, we really
haven't spent the amount of time necessary with the
Dynegy people to all agree on a plan. But I think you
can hear pretty clearly what Chuck and his team
thinks is core to the new Dynegy. So the majority of
those international assets that we've held in the
past are certainly on that list, which is high-dollar
numbers.
S. Bergstrom David, I think as you know or at least some know, we
have $4 billion of sales already under contract. Now,
that includes the $3 billion for Portland General,
but we also have three other significant
international assets under contract, which we hope to
close in the not too distant future.
D. Fleshier Okay. Thank you very much. Good luck.
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NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 41
C. Watson Thank you, David.
Coordinator Thank you. Our next question comes from Jim Ferguson
from Alliance Capital.
J. Ferguson Good morning.
C. Watson Good morning.
J. Ferguson A question about some of the fixed income
instruments. Someone commented that the CLNs are
maturing between now and closing. I show the CLNs and
Yosemite maturing between `04 and `07. Are there
others than the publicly issued or the
private-placement issued ones?
R. Doty Yes, Jeff. You might take a stab at that. What I said
just to be clear is a number of the structured
transactions and off balance sheet financings do
mature between now and closing.
Yosemite, you're right, is a longer-term deal. Jeff,
you might help him out on the detail if you can.
J. McMahon Sure, Jim. You're absolutely right. The public
issuances clearly have a
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 42
longer maturing date than six to nine months, which
is the expected closing.
Certainly from the Enron perspective, that is in our
scheduled maturities out there at the dates in which
they mature. That information is provided to Dynegy,
and I need to have Rob comment whether he plans on
attempting to early redeem those, but certainly from
an Enron perspective that is not in our planned
maturities over the next six to nine months.
J. Ferguson All right. Very good. Is there any effect on the
Citibank swaps with the Enron CLNs and Yosemite with
the merger of Enron? Does that get effected? Is that
an early trigger?
J. McMahon No. That would survive the merger.
J. Ferguson All right. Right now the CLNs have at the unwinding
or final stage of the thing, replacement in the trust
assets of an Enron equivalent, Enron senior unsecured
debt. What would be put into that structure under
this merger? Would it be a Dynegy unsecured
obligation?
J. McMahon Yes. I'll have to check the details of that, but the
structure provides for a new entity to basically take
over Enron.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 43
The thought would be then that new surviving entity
could replace the assets with a similar type of
instrument. So rather than Enron, it would be Dynegy.
But obviously Rob needs to get his arms around all
these things.
But I think the realities are these things should pay
at maturity as planned because the Dynegy folks have
seen all those maturities going forward.
G. Whalley This is Greg Whalley. We will be doing another
conference call later this week on Enron and can
address all of the issues associated with these
financings, CLNs, etc., at that point in time. I
believe we're going to try and do that on Wednesday.
J. Ferguson Okay. I appreciate. There's a lot going on here.
Question on the Dynegy rating. Dynegy Inc. is a BBB-
at S&P now. Is the new entity going to be at that
Dynegy Inc. BBB-level? Or is it going to be at the
Dynegy Holdings BBB flat level?
R. Doty Our target is to have as strong a set of ratings that
we can get. We are considering a number of structural
items right now so that we wouldn't have a parent
company notching like the current Dynegy structure
has.
I would expect ratings of BBB or Baa2 or better.
We've got a lot of work do, I think, with the
agencies over the next several months between now
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 44
and closing. I think their initial reactions were
very positive to the transaction.
We spent a lot of time with them last week. We showed
them what the combination looks like. We showed them
what the cash flow generation capability is going to
look like. We talked a lot about the strategy of the
businesses going forward, and ultimately I think they
will be comfortable in that range.
So we're looking to mid-BBB or better as a simple
answer to your question.
J. Ferguson Okay. Thank you. One last question and I'd rather ask
it now rather than wait for Wednesday, but Jeff, if
you could just comment on the Enron liquidity
situation from now to year end. As Enron alone, was
it not going to be sufficient to meet your
obligations?
J. McMahon You mean prior to this merger?
J. Ferguson Yes.
J. McMahon We definitely needed to raise some type of equity
capital to ensure that we had adequate liquidity. I
think I would answer your question, Jim, to say
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 45
that in normal market conditions we would have had
adequate liquidity, but these clearly are not normal
market conditions for Enron. So we needed some type
of equity capital between now and the end of the
year.
J. Ferguson Fair enough. Thank you.
Coordinator Thank you. Our next question comes from Kirt Louner
from CS First Boston.
K. Louner Yes, good morning. Kirt Louner, CSFB. I just want to
get into the valuation implications of the accretion
and merger synergies that you described. If you
could, in broad terms, talk about the accretion as a
percentage from operations, from an interest expense
savings, from other areas?
Since you described the merger synergies on top of
those, what percentage of those merger synergies are
from cost savings, and what are operational issues?
If I could just add one more final question, when you
look at the marketing and trade business pro forma
the completion of the deal, any guesses as to what
the average length of your trading books and what
percentages of the earnings from them will be in
cash?
R. Doty That's a lot of questions, Kirt. Rob Doty. You might
have to help me
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 46
back through those. But the accretion level, first of
all, that we talked about -- $0.90 to $0.95 -- is all
at the operating level and does not have anything to
do with cost savings and synergies.
If you just take the $400 million that we've said we
believe fairly strongly that we could gain in cost
savings, that would be incremental to the $0.90 to
$0.95. So very strongly accretive transaction from
operating activities.
Your next question had to do with the length of the
trading book, I believe, or maybe I got them out of
order. We actually might let Steve handle that one.
Our assessment to date is that Enron and our books
are fairly short in duration, and we would expect no
real change in that.
We would expect most of that - and most is probably
not a strong enough term - but a very substantial
portion of that to be from cash. The earnings
associated with the activities that flow in and out
of the book.
Since both companies have fairly short trading books
at this point in time, I think that a very, very
substantial share of the earnings will be cash in
nature.
S. Bergstrom I agree with that.
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NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 47
R. Doty That's the shortest you've ever been.
K. Louner Okay. Thanks. If I could just reiterate one other
portion of that was the proportion of the accretion
coming from interest expense savings with the
ChevronTexaco capital infusion and the improvement of
the overall balance sheet.
R. Doty Yes. What I did was I took $21/2billion in
contribution at a 61/2% rate, used a 30% or 32% tax
rate and 650 million shares. If you do that, you will
get about $100 million, a little over $100 million.
K. Louner Okay. Thank you very much.
R. Doty You bet.
Coordinator Thank you. Our next question comes from Jeff Dietert
of Simmons.
J. Dietert Jeff Dietert with Simmons. Congratulations on the
transaction. The Wall Street Journal reported this
morning that Dynegy had the right to walk in the
event that legal and financial liabilities exceeded
$3.5 billion.
Could you give us a little bit more information on
that? Should we look at that as the material adverse
change amount? Or what should we make of this?
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 48
R. Doty I'll take a shot at it and my friends at the table
here might clean me up. The $3 1/2 billion has just
to do with litigation of Enron. That's all
litigation, not just the shareholders suit. We've
looked at their potential legal claims in general,
and we've looked at their shareholder suits in detail
and thought about it very carefully.
The $3 1/2 billion number is designed to take care of
both. Even if we had a very, very substantial
settlement on the shareholder side, it would be
difficult to get to the $3 1/2 billion. But it's just
a bright-line test on the legal claims against the
company.
We also have in addition to that a general material
adverse effect clause. If there's any material change
in the assets ,businesses, etc. of Enron, then that
would also qualify as a material adverse change. But
that's how it works.
On the material adverse change general clause, our
lawyers describe it this way. It's a pretty blunt
instrument. It's difficult to make cases under that,
and we felt like with the litigation, we needed a
specific provision on that.
J. Dietert I agree with David's comment that I think investors
appreciate the upside
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 49
associated with the deal and accretion. Just
exploring the unlikely event that the deal would come
apart, your previous guidance for `02 has been $2.50
to $2.60 range.
With the Chevron infusion of $1.5 billion, would that
create some potential dilution to those earnings, or
would that be offset by the addition of Northern
Natural into your portfolio? Could you help us with
what the guidance is in the downside event that the
deal does fall through?
R. Doty Right. The $21/2billion, only a billion and a half
comes in up front, and that goes over to Enron. So
that should not affect our numbers. There's kind of
some pieces that are moving around there, but we
don't expect that to have a material impact on
Dynegy. So our numbers before the combination would
still be good.
Also, if the transaction were to terminate for some
reason, we would have Northern Natural, and that
would easily offset the dilution from the billion and
a half dollars of equity.
J. Dietert Thank you for your comments.
R. Doty You bet.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 50
Coordinator Thank you. Our next question comes from Carol Coale
from Prudential.
C. Coale Hi. Good morning. Just to follow real quick on Jeff
Dietert's comments, and then I have some of my own.
Just to clarify on the ChevronTexaco investment, it
says in their press release that they are investing
this $1.5 billion as a significant discount to
Dynegy's closing price on Friday, November 9th. When
we originally did our calculation on the combined
merger between Dynegy and Enron, we were using 340
million shares outstanding for Dynegy. In your
earlier comments, you said 420. So that's an increase
of about 80 million shares. Are we to assume that
Chevron is investing into a convert that converts at
$18.75 a share of Dynegy?
R. Doty No, you have to also take into account a half the
billion dollars that they're contributing at closing.
The discount that they have was actually only a 5%
discount off of market at the time we negotiated it
last week.
That was a pretty standard discount that most equity
that's raised by public companies would receive a
discount. So we gave them a 5% discount, which is
about what we would have gotten from other equity
sources.
In the meantime, the transaction leaked as you guys
know very well,
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 51
starting at about Wednesday and our stock started to
run up. So in fact, today it is a substantial
reduction off of current market. But they are 5%
below a price that was market last week and actually
have some provisions to use different prices at
closing if they're substantially better.
C. Coale Okay. To clarify one more thing, you mentioned in
your comments that Enron could retire, maybe I
misunderstood this, but they could retire preferred
before the deal closes. I was just wondering if you
could clarify what those circumstances were or
clarify your comments on that?
R. Doty The only provision has to do with if Dynegy were to
terminate the transaction and if Enron had sufficient
liquidity, they could cash us out of the preferred
instead of giving us Northern Natural.
C. Coale Okay. I have the same concerns that some of my peers
have related to the earnings quality at Enron, and
specifically you were mentioning how strong the
wholesale business at Enron has been. What can Dynegy
do, if anything, to keep Enron's traders and book of
business from leaving for competitors before the deal
closes?
Secondly, are you discounting when you look at the
wholesale profits, the fact that a portion of those
earnings came from what used to be called asset
investments where Enron leveraged their risk under
derivative-type
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NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 52
situations, like in Rhythms, for example, leveraged
that risk off to the partnership, which I assume they
will no longer be doing. Is that discounted in your
forecast earnings? Those are the two questions.
G. Whalley This is Greg Whalley. I'd like to first address the
Enron traders and marketers. I believe that we will
retain the people that we have. They're accustomed to
being part of a winning team, and I think they'll see
this as being a wining team going forward.
We've talked with most of our leadership. They are
very pleased with the additional infusion of equity,
the creation of instant liquidity and stability in
the marketplace for us to be able to carry the
franchise going forward.
So I am not looking for any major issues there, and
we'll be working with all of the leadership in the
trading and marketing operations to make sure that
that's true and that that maintains itself on a
going-forward basis.
I believe that as for the past few weeks, they're
probably very pleased with the stability that this
merger brings them and excited about the prospects of
putting the two operations together.
S. Bergstrom This is Steve. I concur with that. I think that most
traders want to be part of the winning team. I think
this is going to be a combination that will be
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NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 53
the winning team, and I feel confident both from
Dynegy's perspective because we have similar issues
there as well that these folks, the A players, will
stay around to be part of the winning team.
I think the second part of your question, Carol, on
the income model from Enron, we have for various
reasons because of some of the distractions that this
kind of thing brings, we've haircut their model or
their business by 25% and taken into consideration
various things. Even with that and without counting
the synergies that we know are there, it's still
$0.90 to $0.95 accretive. So we think there's a lot
of room for a lot of those issues to go by the
wayside.
K. Lay Jeff McMahon, you may want to address the Rhythm
situation.
J. McMahon I think Rob made the point a little earlier which is
consistent with Steve's comments. The issues with
these partnerships are predominately non-core
businesses, so the way the Dynegy folks took the
projections were based on taking the core business
and extrapolating those out.
C. Coale Okay and I don't want to hog the call, but was any of
the restricted stock that Enron pledged to the SPEs,
was any of that treasury stock?
J. McMahon Was any of it treasury stock at the time it was
pledged? Is that the question?
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 54
C. Coale Well, why don't I ask both?
J. McMahon The answer to your question then is no, but when it
comes back, it's effectively treated as treasury
stock.
C. Coale Okay. So you've earned returns on stock that was in
the treasury or was, I guess, you later put the stock
in the treasury after those returns had already been
earned?
J. McMahon When the shares came back, when these partnerships
unwound, maybe the best answer is that we'll get in
more detail on Wednesday when we have a conference
call. But it is a complex issue. It's both
derivatives and feature stock issuances. So there
weren't actual shares that were issued out there in
large numbers.
C. Coale Okay. Well obviously our concerns are the SEC
restrictions against earning returns on treasury
stock. But, okay thank you for indulging my
questions, gentlemen.
M. Nollen All right. I think we have time for one more,
operator.
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MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 55
Coordinator Thank you. Our last question comes from Raymond Niles
of Salomon Smith Barney.
R. Niles Good morning. A lot of my questions have been
answered, but two questions I want to ask is can you
go into a little more specifics maybe, Chuck or
Steve, into how you might run the whole synergy
business differently or maybe any change from the way
Enron has been running it when you take over?
S. Bergstrom This is Steve. Primarily, their strategy has been to
be a market maker in all markets and be the liquidity
player of the industry. As you know, our strategy has
been more of an asset-backed trading and marketing
strategy. You've heard me say this before that even
in my opinion, you can only have one market maker in
any industry. Enron clearly was it.
Now you combine the two companies together, and I
think you'll see a blend of the two. I think there'll
be more of an asset-backed trading strategy focus on
it, taking the financial capabilities and skill sets
that Enron posses and combining them with a strong
asset position.
I also think you'll see the new entity doing a lot
more of the liquidity market making than Dynegy
itself has historically done. So I think you'll see
more of a blend of the two together than one strategy
or the other.
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NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 56
R. Niles Any particular shift in emphasis maybe with regard to
efforts in Europe or with different commodities or
products? Or you think you'll be moving ahead pretty
much in the same directions?
S. Bergstrom Well I think we're going to sit down with Enron and
really focus most on their North American energy
business here. Their strategy in Europe has been a
little bit different than ours, and we're going to
sit down over the next two or three weeks and really
hash out exactly what are the combined entities going
to be in Europe. But my suspicion is it's going to be
very similar with what we're doing in the U.S. and
North America as well.
They've got a lot more people over there in Europe
than we do, but we still both believe that European
energy opportunities are very, very significant over
there, and I think the combination in Europe really
strengthens our combined position dramatically over
there. We look forward to putting that together and
making that happen over there.
R. Niles Okay. Then two other quick questions. One is in terms
of liquidity backing for Enron, are there any early
indications of market response to this? Or when do
you think you'll have a clear sense as to whether
this is adequate in order to back Enron's operations?
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PAGE 57
G. Whalley Yes, Ray. This is Greg. This morning, activity looks
pretty good. We should over the course of this week
be able to give you a very reasonable assessment of
the market reception to the incremental liquidity of
Enron.
R. Niles Okay. One last question. Just in terms of key
employees at Enron. Maybe it's too early to talk
about it, but will there be any specific efforts or
provisions just to retain key people during this
interim period?
G. Whalley To the extent necessary, yes there will be, but right
now I believe for the most part people are pleased
with the introduction of the new liquidity, pleased
with the stability that it brings and really want to
go about establishing or re-establishing our energy
franchise.
K. Lay Ray, as you know, it's always been one of our highest
priorities to do what we need to do to retain our
best talent. I mean, as we've said more than once
around the table today, this business is all about
intellectual capital. Both companies have a lot of
it.
C. Watson Ray, this is Chuck. Let me assure you, both these
companies have had a tremendous, I think, success
ratio in keeping our best folks, and nothing's going
to change there.
As I've mentioned before, if there's any change in
kind of the whole
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NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 58
compensation plan, the combined plan, know that I'm a
very strong believer in the team concept. I don't
want to see individuals do really well if the company
doesn't do well and the department and the division
doesn't do well. That's sort of embedded in both
companies. It's certainly going to be embedded in the
combined company.
So if there's one thing - and I know there's been a
lot of noise about the employees -- they're very much
on the front burner in terms of what we're concerned
about in combining these two entities. But I agree
with Greg. I mean this is an outstanding combination
and if I was in this industry, this is a combination
I'd pick to work for. So I don't see that to be as -
it's an important issue, but one that I think all
employees will realize the value in this combination.
So listen, I'd like to at this time to thank all of
you for listening in. I know many may not have gotten
your questions in, but I thank you so much for
listening in.
It's been an exciting day, here. It's been an
exciting couple of weeks, but I'll tell you this
combined entity is a platform for something really
special in the future and I hope most of you share
that opinion.
I thank you so much for coming in today, and have a
good day.
SITRICK & CO.
MODERATOR JOE BUNNING
NOVEMBER 12, 2001/8:00 A.M. CST
PAGE 59
Coordinator Thank you for participating in today's conference,
and have a great day.